After gaining 139 points minutes after the market opened Monday, the Dow Jones industrial average fell nearly 40 points after a key manufacturing index tumbled in July.

The Institute of Supply Management said its manufacturing index fell to 50.9. That was barely above the 50 point figure that indicates growth. Economists had been expecting a much higher reading of 55.

The manufacturing report comes just one trading day after the government said that the economy grew at an annual rate of just 1.3 per cent from April through June. This year, the economy has grown at its slowest pace since the recession ended in June 2009. Sharp reductions in short-term government spending could further weaken the economy, analysts say.

The Dow Jones industrial average was down 39 points, or 0.3 per cent, to 12,105 in midmorning trading. The broader Standard and Poor's 500 index lost 5, or 0.4 per cent, to 1,286. The Nasdaq composite lost 7, or 0.3 per cent, to 2,749.

Bond yields fell to the lowest level of the year as investors moved into safer assets. The yield on the 10-year Treasury note fell to 2.73 per cent from 2.80 per cent late Friday.

Stocks rose early Monday after President Barack Obama and Congressional leaders announced Sunday that they had agreed on a deal to raise the nation's borrowing limit ahead of Tuesday's deadline. Investors have been worried that the U.S. might default if a deal wasn't reached.

Investors are expecting the deal to pass Congress as early as Monday. The federal government will be unable to pay all of its bills if a law is not signed by the end of Tuesday, including interest payments on Treasury bonds, salaries of federal employees and Social Security checks to retirees.

Some investors remained skeptical about the impact of a debt deal. "This agreement didn't resolve any of the fundamental differences in the direction of spending and revenues that would address our long-term issues," said Kate Warne, the investment strategist at Edward Jones.

The debt agreement would raise the U.S. debt limit by $2.1 trillion. It would also cut at least $2.4 trillion in federal spending over 10 years. Under the bill, a new joint committee of Congress would recommend deficit reductions by the end of November that would be put to a vote by Congress by year's end.

Credit ratings agency Standard and Poor's declined to comment on whether the bill contained enough deficit-reductions to prevent a downgrade on U.S. debt. Some investors say a downgrade remains a possibility.

"The debt agreement was a step in the right direction but probably a small step," said Bob Gelfond, the head of MQS Asset Management, a hedge fund based in New York City.